Apr. 9, 2020

As the coronavirus pandemic continues, fund managers are facing fallout to various parts of their businesses. In addition to ensuring the ongoing safety and productivity of their employees, managers must address increased cybersecurity risks from a distributed workforce, while also limiting disruptions to their marketing and investment activities. To aid with mitigating those risks, the Hedge Fund Law Report interviewed several legal professionals on how fund managers can smoothly navigate the coronavirus pandemic. This second article in a three-part series recommends disclosures to provide while marketing during this period, features to review in key person provisions and cyber risks to mitigate. The first article detailed the SEC’s relief for Form ADV and Form PF filings, as well as guidance for communicating with investors and managing liquidity risks introduced by the coronavirus. The third article will prescribe best practices for fund managers to ensure business continuity, mitigate vendor risks and otherwise avoid operational disruptions. For more on cybersecurity risks, see “How Fund Managers Can Establish Effective Incident Response Plans” (Jul. 18, 2019); and “Steps Hedge Fund Managers Should Take to Defend Against the Rising Threat of Ransomware in the Wake of WannaCry” (Jun. 15, 2017).
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Hackers and cybercriminals seek to exploit their targets’ weakest links, and executives of hedge fund advisers who fail to use appropriate cybersecurity measures expose themselves and their firms to risk of attacks. A recent program presented by cybersecurity and privacy protection firm BlackCloak, LLC explored the current cyberthreat landscape and key risk vectors, as well as ways that advisers and their executives can defend against those risks. The program featured Dr. Christopher Pierson, CEO and founder of BlackCloak. This article distills his insights. For more from Pierson, see “How Hackers Can Infiltrate Fund Managers Through Executives, and How to Stop Them” (Apr. 18, 2019).
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With the recent release of proposed amendments to modernize the so-called “advertising rule” under the Investment Advisers Act of 1940, fund managers must prepare for changes to how they prepare and review disclosures to current and potential clients. A recent program sponsored by K&L Gates provided a comprehensive overview of the proposed amended rule. The presentation featured Michael S. Caccese and Michael W. McGrath, chairman and partner, respectively, at K&L Gates; and Todd Juillerat, senior vice president at The Spaulding Group. This two-part series presents the key insights from the panelists. This second article outlines the proposed “fair and balanced” standard for advertising statements, as well as new guidance on performance statements. The first article provided background on the current and proposed advertising rules. See “SEC Proposes Expanding Permissible Performance Advertising Practices With Favorable Treatment for Private Fund Managers” (Dec. 5, 2019).
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The ongoing coronavirus pandemic has affected practically every aspect of a hedge fund manager’s operations, and investments are no exception. For example, given the volatility of the stock markets, fund managers may be tempted to deviate from their disclosed investment strategies to pursue more defensive strategies. Telling investors the manager is pursuing one strategy and then actually pursuing a different one, however, may constitute style drift and could result in an enforcement action or investor lawsuit. In addition, the current crisis may increase the risk of insider trading, as noted by Stephanie Avakian and Steven Peikin, Co‑Directors of the SEC’s Division of Enforcement, in a recent statement on market integrity. Other investment-related risks that may be triggered by the pandemic include liquidity issues caused by an increase in redemption requests; challenges with calculating net asset value in the current climate; and restrictions on short selling in certain jurisdictions. This article comprises a list of key articles from the Hedge Fund Law Report’s archives to help fund managers identify, mitigate and avoid those risks.
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The Hedge Fund Law Report recently added Nicole Arrow to its growing team as an Associate Editor. Arrow is an experienced lawyer with extensive expertise in fund formation and regulatory compliance. She joins the HFLR from Mayer Brown, where she assisted with the creation of the private funds practice group. Arrow has also been seconded to Man Investments USA Holdings Inc., a global investment management firm. The HFLR encourages readers to contact Arrow at nicole.arrow@iongroup.com or +1 (212) 686‑5316 to discuss what they are seeing in the industry.
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